WASHINGTON — Federal Deposit Insurance Corp. Vice Chair Travis Hill said Monday that regulators should have made more of an effort to sell Silicon Valley Bank immediately after it was closed, and failing to do so may have made it harder for the bank's assets to be sold.
Speaking virtually at a panel held by Georgetown University on Monday morning, Hill said the reputational harm caused as the public
"What we really needed was somebody with very high stature at the top of government reaching out to the different bank CEOs who potentially could make credible bids for the institution and encouraging them to bid, finding out what type of obstacles or impediments there might be to bidding and seeing what can be done to try to address some of those concerns," Hill said. "Once the bridge bank was open that Monday, it was a reminder to everyone that that's a very undesirable place to be as value seeps out."
While he was critical of the slow bidding process, he commended regulators for heeding lessons from SVB's failure as they moved to resolve First Republic Bank, which failed months after SVB in early May. He said SVB's failure made regulators more willing to strike a deal with a megafirm like JPMorgan Chase, even if it meant inflating the balance sheet of the largest U.S. bank.
"First Republic Bank was a lot better," Hill said. "A big part of that was just having a lot of time and a runway where everyone knew the bank was in trouble. The lessons of SVB's failure helped everyone kind of get over those hesitations [over certain resolution options]. It was very positive that the bidding process was open to a large number of bank and non bank bidders and that the ultimate bid elected was the one that was deemed least costly to the Deposit Insurance Fund."
When asked about any undue risk he sees lingering in the banking system, Hill said that banks' rising deposit funding costs and uncertain commercial real estate credit quality were his top concerns.
Last quarter, he said, banks saw the largest quarterly decline in deposits since the FDIC started keeping records on this in the early 1980s. According to the FDIC, roughly $470 billion in deposits left the system in the first quarter of 2023.
"As deposits are leaving, banks are forced to pay more to keep deposits. And so you know, last quarter the net interest margin across the industry fell for the first time since the Fed started hiking rates," he said. "Deposit costs continue to go up, while the growth in the amount banks can earn on their assets has fallen off."
He said he is less concerned about smaller institutions like Minority Depository Institutions and Community Development Financial Institutions however, who, he says, lack the kinds of risky characteristics like high uninsured levels of deposits, low-yield fixed-rate assets and concentrated tech industry exposure which caused other banks to feel stress this year.
"In a quarter where we saw record decline in deposits across the industry, at MDIs and CDFIs, in total, with some variety from bank to bank, [deposits] increased."
He added that the FDIC is closely watching industry concerns around commercial real estate portfolios to understand
"So far, the data still looks very good, all things considered," he said. "The question is, at some point, do we start to see some deterioration and if so, how big is the problem? And how much exposure do the banks have?"
Hill added he is interested in taking a hard look at what can be done to reform the Fed's reverse repo facility to help banks compete with
"Money market funds and certain other counterparties can place substantial amounts at the reverse repo facility and earn a very high interest rate — almost as high as what the Fed pays out on bank reserves — but they have much different cost structures. So it's much easier for them to just pass that rate along," Hill noted. "It does seem like there might be small tweaks that could be made to try to make [money market funds] a little bit less of an attractive competitor."
Hill capped the fireside chat by urging his fellow policymakers to carefully consider any new regulatory changes, and added that any proposal consideration should wait until the full effects of the Fed's most recent rate cycle can be evaluated.
"There are still some fragilities in parts of the banking sector and we are, in some ways, still sort of trying to rebuild confidence in the industry," Hill said. "I think there's a compelling argument to at least get through this rate hiking cycle and sort of see where the dust settles. Once we're through that, take a look at the lay of the land, see what are the lessons learned, and then at that point, take a look at the potential proposals."
